ABSTRACT HIV assembly occurs at the plasma membrane within specialized membrane microdomains (commonly known as lipid rats) that exhibit reduced lateral mobility owing to an enrichment of saturated lipids including PIP2, ceramide, sphingomyelin, and sterols. The HIV-1 Gag precursor protein targets to the inner leaflet of these plasma membrane microdomains and regulates essential events required for virion assembly and budding. However, the mechanisms by which Gag regulates the formation of these microdomains and the role for these microdomains in viral assembly is currently unknown. Here we provide the first evidence that Gag co-localizes with the sphingomyelin hydrolase nSMase2 (which catalyzes the formation of ceramide from sphingomyelin), and that nSMase2 is a critical regulator of HIV replication. In preliminary experiments we discovered that this enzyme is required for the successful completion of the late stages of HIV assembly and maturation. Pharmacological inhibition or genetic deletion of nSMase2 prevented the processing of Gag and resulted in the production of irregularly shaped immature non-infectious virions. In humanized HIV infected mice, inhibition of nSMase2 produced a linear decrease of viral loads to below detectable limits in the majority of animals tested. More importantly, animals who achieved viral loads below detectable limits with treatment, did not exhibit viral rebound when drug administration was discontinued. The findings from these studies will increase our basic understanding of the viral replication cycle by describing for the first time a role for nSMase2 and ceramide in HIV replication.